7/05/2006 @ 5:05PM

Lay Cheats Justice

With his death from a massive heart attack today, Ken Lay cheated justice. And then some. Not only will the Enron founder not end his days in prison, but according to legal precedent, his entire case will be erased from the records.

That means that, in legal terms at least, Lay was never convicted, tried or even indicted for Enron misdeeds.

For Lay’s estate, and his widow Linda, the positive implication of this grim day is that the government now has no means to collect on its forfeiture claim against Lay for $43.5 million.

It’s hard to believe, but the case law on this point is crystal clear, says Peter Henning, professor at Wayne State University Law School. “The idea is that you can’t punish a dead person. It’s not fair,” says Henning. “Lay didn’t get a chance to go in front of a court of appeals, which he had an absolute legal right to do.”

The direct legal precedent was set in 2004 in the Fifth Circuit case of United States v. Estate of Andrew Clyde Parsons; Houston, where the original Enron trial was heard, is in the Fifth Circuit. Convicted by a jury of arson, mail fraud and money laundering, Parsons’ case was further along than Lay’s when he died. He had forfeited some money to the government and was in the process of challenging the conviction. After his death, the Parsons estate sued the government for return of the forfeited money. It didn’t get the cash back, but the court vacated the conviction and sentence (including an additional order of restitution) and dismissed the original indictment.

The court’s rationale: “The finality principle reasons that the state should not label one as guilty until he has exhausted his opportunity to appeal. The punishment principle asserts that the state should not punish a dead person or his estate.”

“The prosecutors are not going to be able to fight this one,” says Henning, who adds that the basic tenet behind the Parsons decision goes back to a 1971 Supreme Court case.

That said, there’s nothing stopping civil suits from progressing against the Lay estate. In particular, the Securities and Exchange Commission has such an action pending. To the extent that the government still wants Lay’s money, it will go after it there.

More likely, the SEC will settle that case rather than draw a bereaved Linda Lay into another course of lengthy litigation. With Lay’s conviction erased, neither the SEC nor any other civil plaintiff will be able to use it as proof of wrongdoing (though it would still be able to use evidence and testimony given in the trial, says Henning).

That makes it more likely that Linda Lay will be able to hold onto remaining assets, like the Lays’ $3 million Houston condo. Having sold several properties in Aspen to pay legal bills, the Lays were reportedly renting a place there when Ken Lay died.

Larry Ribstein, a law professor at the University of Illinois College of Law, thinks Lay’s death might provoke a reevaluation of government strategy in pursuing white-collar criminals. “A natural sympathetic reaction will cancel some of the anger that was driving all this,” he says.

That could end up being good for Lay’s co-defendant Jeffrey Skilling. But with three months to go before his October sentencing, any sympathy will have likely faded. In fact, with Lay out of the picture, the government’s appellate case against Skilling will be less complicated.

Will the sins of the master now be foisted on his acolyte? Ribstein hopes not. “Anybody who thinks Lay deserved to spend the rest of his life in jail is either a fool, a politician or a journalist,” he says.

He thinks the Enron gang should be given a chance at redemption a la Michael Milken, the Drexel junk bond king who has made a cause of improving educational opportunities for children since emerging from prison. “Milken redeemed himself. Maybe Ken Lay, if given the chance, would have done the same.”

Regardless, Lay did his estate and his legacy a favor by dying early. Now that Lay’s no longer a felon, maybe the University of Missouri at Columbia will be able to fill its open Kenneth Lay Chair in International Economics.